The Farm CPA

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

What's My Gift Limit?

Sep 27, 2011

A reader asks the following question:

"Can I give a lot of shares in a family farm corporation to my kids gift-tax exempt? Is this just a one-time thing?"

The subject of gifts can be misunderstood for many farmers. In general, you can give up to $13,000 (the annual exclusion amount) to as many people as you want each year without having to file any gift tax return. This money is generally not taxable to the recipient; however, you are not able to deduct the gift, either.

You are also able to gift more than this amount by making payments for medical or educational expenses directly to the institution. If you make the check to the individual who then writes the check, the limit for reporting is the $13,000 annual amount.

You are not limited to making only one gift to a person per year. You can make multiple gifts; it is the total amount for the year that is important. If less than $13,000, no reporting for that person is required.

The lifetime exclusion for 2011 and 2012 is currently set at $5 million. In 2013, it is scheduled to revert back to $1 million, however. Discussions about making a higher amount permanent are ongoing, but with 2012 being an election year, we would not count on this happening soon.

As to the reader's question, an annual gift of corporate stock equal to the annual gift exclusion amount could shield substantial amounts of stock from the gift tax. For example, assume a farmer and his spouse have four children who are married. Each year, the farmer can gift 4 x 2 x $13,000 (gifts to child and spouse), or $104,000 of corporate stock value, and his spouse can gift the same amount. This equals a total of $208,000 annually and, over ten years, would exceed $2,000,000 in value that would escape gift taxes.

Additionally, with the lifetime exclusion being $5 million this year and next, the couple could gift $10 million immediately and not pay any gift tax, and the appreciation in value would escape their estate.

Over ten years, they could easily gift $12 million, and if they take advantage of corporate stock discounts that may be available for the lack of marketability and minority interest, they may be able to gift upwards of $20 million of stock value over a 10-year period.

This is one of my longer posts, but this year and next it is extremely important to review your current gifting program and see if it makes sense to gift more assets to your children and grandchildren. As with all tax-related considerations, make sure to review this with your tax adviser.